Key Points:
•    Earnings Surprise Ratio (#beat/#miss) at 5.26, almost double normal
•    Median Earnings Surprise 7.20%, very strong
•    Year-over-year Earnings Growth Ratio (# Pos Growth/# Neg Growth) at 0.80
•    Sales Surprise Ratio at 1.44
•    Sales Growth Ratio at just 0.43
•    Total Net Income for S&P 500 reported so far is 11.1% below what those same 478 firms reported a year ago, 10.3% above what they earned in 2Q09
•    Total S&P 500 Revenues reported so far down 10.9% year over year, up 3.4% from 2Q09
•    2009 Earnings Revisions ratio for full S&P 500 falls to 3.00, down from 3.25 last week, still very high
•    2010 ratio at 1.98, down slightly from 2.09 last week
•    S&P500 expected to earn $574.1 billion in 2008, $707.3 billion in 2010
•    Bottom Up estimates: $62.57 for 2009, $77.11 for 2010
•    Top Down estimates: $54.38 for 2009, $70.05 for 2010

Welcome to the new Earnings Trends. We have decided to start focusing our analysis of the S&P 500 based on Zacks’ own sector groupings rather than the S&P GICS sectors. There are 16 Zacks sectors and only 10 GICS sectors, so the new groupings will result in better granularity of the data. The old way simply grouped too many very different companies together. In addition, we for the first time are presenting top-line as well as bottom-line expectations and surprise information. This is very much of a work in progress, and we will be adding additional information, tables and perhaps even some graphs over the next few months.

It’s almost time to close the books on a fantastic earnings season. With over 95% of reports in, there have been 363 which have exceeded expectations while only 69 have fallen short, a ratio of 5.26. While it is true that most companies will normally try to under-promise and over-deliver, this quarter the beats are beating the misses by about twice the normal margin of 3:1.

Nor have all the surprises only been by a penny or two, but there have been lots of companies that simply crushed their earnings estimates. The median surprise is a very high 7.20%. Over the last five years, a median surprise of about 3.0% has been normal. Part of the reason is that expectations were set very low going into the earnings season.

For most companies, their earnings are still below year-ago levels, just not as far down as people thought they would be. Only 213 firms have posted positive year-over-year growth versus 265 which have fallen short of year-ago levels, a ratio of 0.80.

The disparity between firms beating estimates but having negative year-over year-earnings growth is particularly noticeable in Tech, where the earnings surprise ratio is an awesome 7.57. However, the growth ratio (# of firms with positive growth/# of firms with negative growth) is just 0.64. Energy’s surprise ratio is not quite as high, at 3.22, but the disparity to its growth ratio, at just 0.53, is extreme. Staples and Medical have been both growing earnings and beating expectations.

On the top line, it has also been a successful season so far relative to expectations, but in terms of actual year-over-year growth it has been downright ugly. The total revenues of the 478 firms that have reported are 11.1% below year-ago levels. A total of 267 firms have reported higher-than-expected revenues, versus 185 that have disappointed, for a ratio of 1.44.

On the other hand, only 143 actually had higher sales than a year ago, versus 335 with lower revenues, a ratio of 0.43. Put another way, only 29.9% of all firms reporting so far have had higher sales than a year ago.

In other words, cost-cutting has been the major force driving earnings and earnings surprise. However, the costs to one company are either the revenues of another company, or someone’s paycheck, which is then spent to create revenues for firms.

The bottom-up data coming out of all these individual firms seems to confirm what we have been getting from the macro statistics from the government: the economy is growing due to increases in productivity. There is higher GDP with fewer workers. While clearly companies cannot continue to grow earnings forever based only on cost-cutting, it does mean that when they do start to see revenue growth, earnings growth could be explosive as the greater operating leverage kicks in.

The strategy seems to be working as earnings are coming in much better than expected, and analysts have responded by increasing earnings estimates for 2009. The estimate increases are widespread across sectors, with four sectors seeing more than six increases for each cut.

No sector is seeing more cuts than increases. For the S&P 500 as a whole, the revisions ratio now stands at 3.00, which while slightly lower than a few weeks ago, is still very high and in distinct contrast to earlier in the year when it fell below 0.15 at one point. The better-than-expected earnings are translating into estimate increases for 2010 as well as 2009, with a revisions ratio of 1.98 for next year.

Scorecard & Earnings Surprise
•    Season almost over – 478, or 95.6% of reports in
•    Data presented reflects only firms that have reported so far
•    Reports so far extremely positive relative to expectations
•    Earnings Surprise Ratio (#beat/#miss) at 5.26
•    Medical almost perfect with a ratio of 35 to 1, Staples strong with a ratio of 11.7
•    Median Earnings Surprise 7.20%, very strong reading
•    Eight sectors total done, a few Retail and Staples firms yet to report
•    Year-over-year Earnings Growth Ratio (# Positive Growth/# Negative Growth) at 0.80
•    Massive positive surprises in cyclical Construction, Industrial and Discretionary sectors

In evaluating the data presented here, keep the percent reported in mind; for some sectors the sample size is extremely small. The move to the 16 Zacks sectors means that even when all reports are in, some of the sectors will still have relatively few firms in them. For firms with only a few reports in, the median surprise will be very volatile as new firms are added to the sample.

Overall, two small sectors, Conglomerates and Business Services, appear to have the most impressive performance so far this quarter on the surprise front. Among the larger sectors, strong arguments could be made for Staples having the best surprise profile, although Industrials are also in contention. 

Sales Surprises
•    Sales Surprise Ratio at 1.44
•    Staples missing on Sales even as they beat on earnings
•    Tech looks terrific, 3.33 sales surprise ratio
•    Sales Growth Ratio at just 0.43
•    Most Tech firms have declining sales, but less of a drop than expected
•    Under 30% of all firms reporting so far have higher revenues than last year

Reported Quarterly Growth: Total Net Income
•    Massive 416.9% growth in Financials due to low year-ago base, earnings up 3.1% from 2Q09
•    Total Net Income for S&P 500 reported so far is 11.1% below what those same 478 firms reported a year ago, 10.3% above what they earned in the 2Q09
•    Going into the quarter, a decline of 23% was forecast for total year-over-year earnings
•    Positive yr/yr growth for 8 sectors, negative for 8, Energy, Aerospace and Materials lag
•    Materials down hard year over year in second and third quarters, but expects huge rebound in the 4Q
•    Total net earnings in 4Q expected to be more than double from a year ago, mostly due to the turnaround in Finance.

Reported Quarterly Growth: Total Revenues
•    Total S&P 500 Revenues down 10.9% year over year, up 3.43% from 2Q09
•    Year-over-year revenue expected to turn positive in 4Q with a 1.50% increase
•    Energy, Autos see large yr/yr declines but the biggest sequential increases
•    Finance clear yr/yr winner; Medical, Aerospace up modestly.
•    Four sectors posting positive yr/yr revenue growth, 12 sectors negative
•    Sequentially, only Staples and Conglomerates see minor declines

Annual Total Net Income Growth
•    Total S&P 500 Net Income in 2009 expected to be 4.7% below 2008 levels
•    Total earnings for the S&P 500 expected to jump 23.2% in 2010, 17.3% further in 2011
•    Total earnings in 2010 to still be below 2007 levels
•    Data for 2011 is still thin, so take with a grain of salt
•    Staples, Medical and Business Services are the only sectors to see positive growth for 2009, although Finance is moving from a loss to a profit. Autos, Construction to see much smaller losses in 2009, move to profit in 2010

Annual Total Revenue Growth
•    Total S&P 500 Revenue in 2009 expected to be 9.4% below 2008 levels
•    Total revenues for the S&P 500 expected to rise 7.0% in 2010
•    Only 4 sectors to post positive revenue growth in ‘09; all but Finance expected to be positive in 2010
•    For 2009, revenues fall more than earnings; for 2010, earnings rise faster than sales – both mean big margin expansion
•    Energy, Autos, Materials and Construction see biggest revenue declines in 2009, but will see large increases in 2010.

Revisions: Earnings
The Zacks Revisions Ratio: 2009
•    Revisions Ratio for full S&P 500 down to 3.00, from 3.25
•    Positive surprises translating to estimate increases for 2009
•    Four sectors seem more than 6 estimate increases for each cut
•    No sector seeing estimates cut on balance
•    Industrials, Autos seeing very large estimate increases
•    Business Service and Conglomerates lead; Retail, Staples and Tech also strong
•    Ratio of firms with rising to falling mean estimates falls to 2.82 from 3.18
•    Total number of revisions (4 week total) down to 4,388 from 4,810 last week (-8.8%)
•    Increases down to 3,291 from 3,677 (10.5%), cuts down to 1,097 from 1,133 (3.2%)
•    Total Revisions activity past peak for this earnings season, will fall sharply over next few weeks

Analysts are responding to better-than-expected 3Q earnings by raising 2009 estimates almost across the board. Unlike the data presented above for the surprises, the revisions data is for all 500 firms in the index. Total revisions activity has picked up dramatically, and will continue to do so over the next week or two, but we are getting towards peak activity..

The broad increases in earnings estimates seems to reflect a much better short-term outlook for the economy. Note that some of the most cyclical areas such as Retailers, Materials and Autos are seeing a large preponderance of upward over downward earnings revisions, and that most of the firms in those sectors are seeing their consensus estimates increase.

On the other hand, the defensive Staples sector has a very high revisions ratio of 8.55, so it’s not just the cyclicals. Then again, given the great performance by the Staples on the surprise front, a strong estimate revisions performance is not surprising.

One industry that has seen some remarkable increases in their estimates for both this year and next is the Semiconductor Equipment industry, with firms like Applied Materials (AMAT), KLA-Tencor (KLAC) and Novellus (NVLS) all seeing no estimates cut and double-digit numbers of increases leading to very large percentage gains in their mean estimates. Those are what one might term new economy cyclicals. Many of the old economy cyclicals like Ford (F) and Cummins Engine (CMI) have also seen large estimate increases.

Revisions: Earnings
The Zacks Revisions Ratio: 2010
•    Revisions Ratio for full S&P 500 edges down to 1.98, from 2.09
•    Positive surprises translating to estimate increases for 2010, as well as 2009
•    Eclectic mix of strong sectors: Staples lead, followed by Industrials
•    Ratio of firms with rising estimates to falling mean estimates at 2.06, up from 2.05 last week
•    Total number of revisions (4 week total) down to 3,956 from 4,209 last week (-6.0%)
•    Increases down to 2,630 from 2,846 (-7.6%), cuts down to 1,326 from 1,363 (-2.7%)

Total Income and Share
•    S&P500 expected to earn $574.1 billion in 2008, $707.3 billion in 2010
•    Excluding Financials, total net income expected to be down 19.3% in 2009
•    Energy Share of total earnings plunges to 10.8% in 2009 from 23.8% in 2008
•    Finance share of total earnings moves from deficit in 2008 to 11.8% in 2009, 14.7% in 2010
•    Medical share of total earnings far exceeds market cap share (index weight)

P/E Ratios
•    S&P 500 trading at 17.5x 2009 earnings, or an earnings yield of 5.71%
•    Trading at 14.2x 2010, 12.1x 2011 earnings, or earnings yields of 7.04% and 8.26, respectively
•    Earnings Yields attractive relative to 10-year T-Note rate of 3.36%
•    Medical has lowest P/E based on 2009 earnings, Aerospace cheapest on 2010 earnings
•    Materials high 2009 P/E to fall dramatically in 2010

Data in this report, unless stated otherwise, is through the close on Thursday 11/19/2009.

Zacks Investment Research

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